Recommendations to the European Commission: A Framework for Tax Simplification

Key Findings

• The European Commission is reviewing recent directives for simplification opportunities, including taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.policy.
• The Commission should build a long-term tax simplification program from these current efforts.
• A focus on sustained growth, meaningful metrics, and institutional capabilities that keep simplification a focus in future regulatory efforts should underpin the decluttering agenda.

Introduction

The European Commission is rightly looking to simplify tax legislation. As global uncertainty increases, the EU can, and should, make itself more attractive for investment by reducing administrative burdens and providing long-term certainty. Especially in light of the Pillar Two side-by-side agreement, TAXUD has an opportunity to change the course of tax legislation with its comprehensive policy review. However, if policymakers take a cautious approach to simplification, then half-hearted reforms will likely leave in place layers of duplicative reporting requirements and anti-avoidance regimes.

Instead, policymakers should propose significant amendments to tax rules in line with the overall deregulatory agenda of this Commission. In our view, the Commission faces three main challenges: an economic challenge, a measurement challenge, and a long-term institutional challenge.

Economic Factors Should Motivate Simplifications

The first is the current global economic context. The European Commission has forecasted gross domestic product (GDP) growth of 1.4 percent in 2026 and 1.5 percent in 2027.[1] Deficits are expected to grow to 3.4 percent of EU GDP. Meanwhile, International Monetary Fund (IMF) forecasts of 2026 growth in North America (2 percent), South America (2.2 percent), Asian and Pacific economies (4.1 percent), and Africa (4.3 percent) significantly outpace the EU.[2] Therefore, policymakers at the EU and national levels should focus on growth.

In the last decade, the EU has tried to achieve a multilateral consensus on international tax reforms with limited success, while receiving increasing pushback from countries like the United States and China. This has made for burdensome legislation and less-than-ideal tax policies. However, by refocusing on its own system, the EU can exercise self-determination, putting the chance of success back in its own hands. Policymakers can use tools like the Tax Complexity Index to see how legislative activity has led to more complex tax systems in certain countries.[3]

While overall tax complexity within the EU is comparable to that of non-EU countries, EU countries are outliers on minimum taxes, controlled foreign corporation (CFC) rules, and group treatment.

Table 1. Average Scores on Select Categories of the Tax Complexity Index

In some cases, these categories of heightened complexity are due to national regulatory regimes. In others, however, the Commission played a role.

When the Commission leads an initiative, it has two choices: it can either add rules on top of national complexity, or it can harmonize national rules. Even when the EU is legislating something in addition to national rules, it should aim to simplify.

To compete in the current global environment, the EU should aim for economic, not regulatory, power. The opportunity for additional growth will not come just from revising a handful of tax rules, but that should not delay the necessary work on tax simplification.

Simplifications Should Prioritize Economic Costs

Growth-oriented results will come from identifying the right policies to change. This brings us to the second challenge: choosing the correct target. While every direct taxA direct tax is levied on individuals and organizations and is not expected to be passed on to another payer (unlike indirect taxes such as sales and excise taxes), though economic incidence can still fall upon others. Often with a direct tax, such as the individual income tax, tax rates increase as the taxpayer's ability to pay, or financial resources, increases, resulting in what is called a pdirective should be within the scope of the current review, policymakers should separate their efforts into reforms that reduce paperwork costs and those that reduce economic burdens. Officials should quantify their goals for reforms on both fronts. Policymakers often focus on the "benefits" of new regulations, but now is the time to develop impact assessments that show the benefits of simplifications.

Pillar Two is an apt example. Policymakers were too focused on expanding the scope of international tax negotiations to evaluate the impact of the first round of reforms from the Base Erosion and Profit ShiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens.project. The recent review done by staff at the Organisation for Economic Co-operation and Development (OECD) demonstrates the value of considering costs and benefits.[4] If policymakers had evaluated the initial reforms before venturing into efforts that became Pillar Two, they might have avoided some of the current challenges.

Academics have already collected many examples of the impacts of the Anti-Tax Avoidance Directive (ATAD) and the Directive on Administrative Cooperation (DAC).[5] Policies like transfer pricing regulations, CFC rules, and transparency requirements come with trade-offs.[6]

Reductions in tax avoidance are clear. However, those reductions come with additional paperwork costs and reductions in real economic activity.

A recent study focusing on the ATAD's earnings stripping rules shows this clear trade-off. While companies saw the tax benefits of additional borrowing decline, higher tax costs were associated with less investment and innovation.[7]

The effort to address tax avoidance requires a balance between allowing the free flow of capital between jurisdictions and protecting the domestic tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates..Policymakers have leaned heavily into protecting domestic tax bases recently, but now is the time to ask whether the pendulum has swung too far and what the impact of those changes is. Anti-avoidance policies should take a very light approach to businesses that demonstrate sufficient local substance and use cross-border financing for real investment.

The EU should identify the right target(s) with quantitative measures of compliance costs and economic impacts. In fact, an impact assessment of the eventual simplification package will be necessary, in our view.

Unlike certain Pillar Two arguments, additional revenues should be weighed against compliance costs, not firm revenue.[8] Identifying potential compliance costs will be key to the EU legislative process going forward.

Institutions Should Support Longer-term Simplification Efforts

Finally, there is political pressure to simplify in the near term, but the need for de-regulation will be ongoing. The challenge is to avoid letting the current simplification efforts expire too quickly. The tautology, "regulators regulate," is important here: those responsible for implementing regulations should not be relied upon to de-regulate.

The simplification effort should leverage the Regulatory Scrutiny Board (RSB). TAXUD has already relied on the RSB to help it more clearly identify problems with legislative initiatives and account for costs and benefits. This is most clearly seen in the Directive on Faster and Safer Relief of Excess WithholdingWithholding is the income an employer takes out of an employee's paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer's filing status, the number of allowances claimed, and any additional amount the employee requests.Taxes (FASTER), which contains a summary of the impact assessments.[9] The RSB issued a negative opinion of the original impact assessment, leading to a revised impact assessment that more directly addressed the objectives of the directive and provided a more complete cost-benefit picture. This revised impact assessment received a positive opinion from the RSB.

This practice should be encouraged and continued. The RSB has the capacity, skillset, and institutional incentives to identify opportunities to improve impact assessments. Input from the RSB can also help policymakers improve their legislative or regulatory approach.

Furthermore, the RSB can also address questions of subsidiarity and proportionality while identifying administrative or compliance challenges that could arise when Member States implement a new policy.

However, the RSB must be given time to play its role. Though simplification is urgent, the RSB should have a chance to evaluate whether any regulatory reforms will achieve simplification within the European Union.

The Commission should also be committed to the long-term value that the RSB can provide in tax policy. Entities like the RSB can become politicized or ignored over time. The RSB relies on institutional commitment from TAXUD and the rest of the Commission, which should be renewed with each legislative proposal.

Conclusion

With a three-fold focus on growth, quantitative analysis, and institutional change, the European Commission can demonstrate leadership on tax policy that strikes the right balance between modernizing tax rules and supporting economic dynamism.

In 2023, Tax Foundation took stock of the landscape of rules meant to address corporate tax avoidance and concluded the following:

Lawmakers should not give up on curbing profit-shifting, and they should take new efforts like Pillar Two seriously. However, where possible, they should refrain from overloading the tax code with too many complex policies and high compliance costs for what amounts to a relatively small fraction of the world's income. In a cluttered field like international corporate tax policy, it is just as visionary to reform, consolidate, or remove policies as it is to create them.[10]

EU policymakers have an opportunity to take a visionary approach to reforming the ATAD and the DAC, and even to rethink the EU's approach to Pillar Two. The policies in need of simplification are plentiful, and the work will be worth it.

References

[1] European Commission, "Autumn 2025 Economic Forecast shows continued growth despite challenging environment," Nov. 17, 2025, https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts/autumn-2025-economic-forecast-shows-continued-growth-despite-challenging-environment_en.

[2] International Monetary Fund, "Global Economy in Flux, Prospects Remain Dim," October 2025,

https://www.imf.org/en/publications/weo/issues/2025/10/14/world-economic-outlook-october-2025.

[3] For further information on the survey and index construction, see Thomas Hoppe, Deborah Schanz, Susann Sturm, and Caren Sureth-Sloane, "The Tax Complexity Index - A Survey-Based Country Measure on Tax Code and Framework Complexity," European Accounting Review 32 (2): 239-273, 10.1080/09638180.2021.1951316.

[4] OECD, "A Decade of the BEPS Initiative," Oct. 15, 2025, https://www.oecd.org/en/publications/a-decade-of-the-beps-initiative_32096fd3-en.html.

[5] The study commissioned by the European Parliament is particularly comprehensive on this subject: Werner Haslehner and Katerina Pantazatou, "Assessment of recent anti-tax avoidance and evasion measures (ATAD & DAC 6)," March 2022, https://www.europarl.europa.eu/RegData/etudes/STUD/2022/703353/IPOL_STU%282022%29703353_EN.pdf.

[6] For a summary of the economic literature on this subject, see Alan Cole, Patrick Dunn, and Daniel Bunn, "Response to OECD Consultation on BEPS 1.0," Tax Foundation, July 2025, https://taxfoundation.org/testimony/oecd-beps-base-erosion-profit-shifting/.

[7] Lisa De Simone, Henning Giese, Reinald Koch, and Christoph Rehrl, "Real Effects of Earnings Stripping Rules," TRR 266 Accounting for Transparency Working Paper Series No. 210, September 2025, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5435834.

[8] Sean Bray, Daniel Bunn, Johannes Gaul, and Christoph Spengel, "OECD Pillar Two Compliance Costs: A Quantitative Assessment for EU-Headquartered Groups," ZEW Discussion Paper No. 25-053, October 2025, https://www.zew.de/en/publications/oecd-pillar-two-compliance-costs-a-quantitative-assessment-for-eu-headquartered-groups.

[9] European Commission, "Proposal for a Council Directive on Faster and Safer Relief of Excess Withholding Taxes," Jun. 19, 2023, https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX%3A52023PC0324.

[10] Daniel Bunn, Alan Cole, and Alex Mengden, "Anti-Avoidance Policies in a Pillar Two World," Tax Foundation, Oct. 17, 2023, https://taxfoundation.org/research/all/global/base-erosion-profit-shifting-pillar-two/.